Romney tax plan: Is it 'mathematically impossible' or not?

One study said Mitt Romney's tax-reform numbers don't add up. Another says they do. The reality: It depends a lot on the assumptions made about how deeply Romney is willing to cut tax breaks for the rich, including incentives for investment.

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Mitt Romney's tax plan is a centerpiece of his vision for economic recovery and jobs. But it has also become the center of a big controversy as he runs for president.

The Tax Policy Center, long viewed as a nonpartisan referee, has issued a report saying Mr. Romney's numbers don't add up. Now the conservative Heritage Foundation has become the latest Romney ally to try to refute that criticism.

At its core, this debate is about whether Romney's goals are "mathematically impossible" to achieve, unless middle- or lower-income households are asked to provide more tax revenue.

The political stakes are high. The former Massachusetts governor is struggling against opposition efforts to define him as a plutocrat who would put the interests of the wealthy above those of ordinary Americans. A key theme of the Romney campaign this week is to project to voters that he cares about them.

"Middle-income people will probably see a little [tax] break, because there'll be no tax on their savings," Romney told "60 Minutes," when asked about his plan.

Here's a look at how the two sides in this skirmish over Romney's tax plan disagree – and how there's actually more agreement between them than you might expect.

The tussle centers around a Tax Policy Center analysis, published Aug. 1, that said Romney's stated tax-reform goals can't all be achieved simultaneously. The report cited five Romney objectives: cutting income-tax rates by 20 percent, being "revenue neutral" for the government, repealing the estate tax, repealing the Alternative Minimum Tax, and preserving and enhancing incentives for saving and investment.

The first two goals alone present a sizable challenge. After all, how do you slash tax rates while preserving the same amount of federal revenue over the long haul? The answer is by "broadening the base," or expanding the pool of US income that is subject to taxatation. This means eliminating or reducing the deductions available to taxpayers. The result is that more income is taxed, but at lower rates.

The Tax Policy Center calculated that even if all tax breaks they assumed to be available under Romney's criteria were wiped out for high-income earners, it wouldn't be enough to keep Romney's plan revenue neutral. Middle- or lower-income households would need to kick an extra $86 billion a year to meet the target. How? Deductions and other tax breaks would have to be reduced by an amount outweighing their 20-percent tax-rate cut.

In effect, the report raised the prospect of higher taxes on the middle class. In stark language, it said achieving Romney's goals is "not possible" without shifting a higher share of the tax burden onto middle- or lower-income households.

Soon the phrase "mathematically impossible" was a favorite with Romney's political foes. Romney's supporters have issued several challenges to the report, but the Tax Policy Center has stuck to its conclusion.

The new counteranalysis from the Heritage Foundation accuses the Tax Policy Center, which is funded by the Urban Institute and Brookings Institution, of "skewed analysis." Author Curtis Dubay argues that the Romney math can work if different assumptions are used.

Separately this week, Romney-camp economist Kevin Hassett called the Tax Policy Center report "the most partisan thing that's come out of a think tank in my lifetime."

But beyond the hyperbole and the testy politics, the dueling views actually share a lot of common ground. Policy experts on both sides generally agree on some important basics: The concept of "lower rates, broader base" can be good for the economy, but the ways to broaden the base aren't infinitely large. And on Romney's plan, while the two sides may debate what's "possible," neither views it as easy to achieve all the candidate's goals simultaneously.

William Gale, co-director of the Tax Policy Center, says the report he co-wrote didn't mean to imply that that Romney would seek to raise middle-class taxes. Rather, the main point was that tax reform along the lines Romney proposes would require tradeoffs.

The Heritage Foundation study uses the Tax Policy Center analysis as a starting point, but then argues that the $86 billion gap it cites in Romney's plan can be closed, mainly through a more aggressive elimination of deductions that are used heavily by upper-income households. Those deductions, including the one for municipal-bond interest and one for life-insurance interest, are ones that the Tax Policy Center figured would be protected under Romney's espoused goal of preserving incentives for investment.

So a core element of the debate is over what incentives for investment Romney would preserve or expand. The Tax Policy Center assumes a broad definition. The Heritage Foundation assumes Romney would take a narrower view. Both agree that Romney hasn't spelled out the details.

The broader question is: How aggressive does Romney intend to be in reducing or eliminating various deductions, credits, and exemptions in the tax code? Many of them, such as ones for charitable giving and home mortgage interest, are popular with voters.

Dubay argues that other steps, which the Tax Policy Center did not consider, could help close that $86 billion gap. He mentions phasing out personal exemptions for high-income taxpayers, and eliminating the "step up" in investment costs (for measuring capital-gains taxes) as the estate tax is repealed.

Conservative critics of the Tax Policy Center also say its report may underestimate the potential of Romney-style tax reform to modestly boost the pace of economic growth.

As arcane as the details sound, they carry political import: Romney supporters are eager to defuse the "mathematically impossible" issue as a Democratic talking point. If they can't, it puts pressure on Romney either to lay out more details of his plan, or to backpedal and revise it.

The math debate prompted the most emotionally charged moment in a televised forum this week that pitted Mr. Hassett (a Romney economic adviser) against an Obama adviser.

When Jeffrey Liebman of Harvard University cited the Tax Policy Center study in support of Obama, Hassett blasted the report and the way Democrats have used it against Romney.

"The notion that anything that Governor Romney has said would support the view that he's going to increase taxes by $2,000 on low-income people – it' s just a lie," said Hassett, a senior fellow at the American Enterprise Institute. While not predicting that Romney would need to change his plan, Hassett said that if the math didn't work out, the answer wouldn't involve boosting the tax burden on the middle class. Instead, he said, the logical move would be to scale back the overall reduction in tax rates.

Dubay also lashed out at the Tax Policy Center, writing in his critique that the center "conspicuously chose to ignore the [Romney] requirement" that the tax code's progressive posture be preserved. The center's report started with the premise of trying to keep five Romney goals, but then bent that sixth one when illustrating the alleged math problem.

Mr. Gale, responding to this concern via e-mail, says he was not aware Romney had stated that sixth goal before "all of the kerfuffle started."

For the record, one occasion when Romney stated the goal was in a CBS interview aired on June 17, when he said high-income Americans should continue shouldering the same share of the tax burden they do now.

He was asked what deductions he would cut.

"My view is the right way to do that is to limit them for high-income individuals because I want to keep the progressivity of the code. One of the absolute requirements of any tax reform that I have in mind is that people who are at the high end, whether you call them the 1 percent or 2 percent or half a percent, that people at the high end will still pay the same share of the tax burden they're paying now."

Romney's critics say he's trying to leave vital and unpopular details of his plan for after the election. He offered a different explanation to "60 Minutes," saying he wants to leave some things open for discussion with Congress, because "leadership is not a take it or leave it thing."

Obama comes in for similar complaints. Neither candidate has talked specifically about major deductions he would cut or eliminate for typical families, although both have said phaseouts of tax-code perks should start with high-income households.

Obama, like Romney, has embraced the idea of tax reform that broadens the base in order to lower tax rates for most Americans. But unlike Romney he hasn't proposed specific rate changes. And where Romney argues for revenue-neutral reform, Obama supports tax reform that raises new tax revenue (focusing on high-income earners) as part of deficit reduction.